Basically, your cost
basis in property is what you paid for it in cash, debt obligations, or other
property or services and includes sales tax and other expenses connected with
the purchase. However, after you acquire property, certain events may occur during
your period of ownership that may increase or decrease your basis; for example,
items such as the cost of improvements add to your basis and items such as allowable
depreciation and insurance reimbursements for casualty and theft losses are deducted
from your basis. The net result of cost plus increase items minus decrease items
is referred to as "adjusted basis." This is the amount used to calculate your
gain or loss for income tax reporting purposes.
Generally,
gains from the sale of property are taxed at either the maximum 15% capital gains
rate, the marginal (your tax bracket) rate, or a combination of the two rates.
On the other hand, losses may be non-deductible, partially deductible or fully
deductible depending on the type of property sold, the holding period and a variety
of other factors. Different assets have different tax rules; not all sales are
created equal and as with anything tax related, there are complications and exceptions
that can arise.
Regardless of whether you expect
to incur a gain or loss, there might be a way to strategically maximize the amount
you get to put in the bank; you might even be able to avoid current tax liability
altogether. There are many specialized rules that possibly can be invoked to ease
your tax burden. But, be careful! The caveats are generally unforgiving and require
careful planning.
It all boils down to knowing
the tax rules for what you are selling. If you cannot answer each of the questions
above, then seek the advice of a qualified tax professional. Otherwise, you may
become a believer after it's too late.
If you would like any further information regarding this issue as well as any other tax related issue, please contact The Henssler Financial Group Tax & Accounting Division at 770-428-4025.
I
always emphasize to clients that sound business decisions should include understanding the income tax implications. However, all too often,
I find that taxpayers make business decisions to sell property and in April of
the following year act as if the tax consequences of what they have done is a
grand revelation to them. 